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SEC Proposes Changes to Accredited Investor Qualifications

The Securities and Exchange Commission (the “SEC”) on January 25, 2011 voted to propose amendments to its rules to conform the definition of “accredited investor” to the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).

The proposed amendments would exclude the value of an individual’s primary residence in calculating net worth when determining accredited investor status. The amendments would also clarify the treatment of any indebtedness secured by the residence in the net worth calculation.

Under SEC rules, individuals and entities that qualify as “accredited investors” are eligible to participate in certain private and limited offerings that are exempt from Securities Act registration requirements. One of the bases on which individuals may qualify as accredited is having a net worth of at least $1 million, either alone or together with their spouse.

Section 413(a) of the Dodd-Frank Act requires that the net worth calculation for determining accredited investor status must exclude the value of the person’s primary residence. This requirement came into effect upon enactment of the Dodd-Frank Act. However, the SEC is proposing to amend its rules to reflect the new standard and clarify the treatment of indebtedness secured by the primary residence in the calculation of net worth.

The new net worth standard must remain in effect until July 21, 2014, four years after enactment of the Dodd-Frank Act. Beginning in 2014, the SEC is required to review the definition of the term “accredited investor” in its entirety every four years and engage in further rulemaking to the extent it deems appropriate.

Under the proposal, the definitions of “accredited investor” in the SEC’s rules would be amended to exclude the value of a person’s primary residence for purposes of the net worth calculation. The proposed rule amendments clarify that “the value of the primary residence” – which must be excluded from the individual net worth calculation – is determined by subtracting from the estimated fair market value of the property the amount of debt secured by the property, up to the estimated fair market value of the property.